Many employers will match an employee’s contribution to his/her retirement account. The match amount is typically limited to a small percentage of the employee’s annual pay, although the employee’s contribution may exceed that amount. In my case, the match is limited to five percent; in my wife’s case, the limit is ten percent. All of this is tax-deferred.
Question:
Is there a legal limit to the match amount?
Example:
Suppose I am an employer and I decide to offer a salary that’s below industry-average for a job, but includes a very large matching contribution to the employee’s retirement account. If the salary and match values are chosen correctly, the employer’s total outlay could be less than industry-average, the employee could ultimately receive more pay than industry-average, and the IRS would end up getting the short end of the stick. So what prevents this scenario from happening?
I don’t know about legal limits, but I would have thought you’d have trouble attracting staff. Having 30% paid into your pension is all very well but it doesn’t help pay the bills.
Right. Plus if you do draw the money out early, you still pay taxes on it plus the penalty.
Anyway, according to the IRS (see bottom) totaled employee and employer contribution cannot exceed 100% of your compensation or $50,000 for 2012 ($51,000 for 2013).
IRS Code Section 415(c) puts a total limit on contributions to an eligible retirement plan, including employer matching contributions. For 2012, the limit is $50,000, with an additional $5,500 for employees over 50.
The way my company scheme works is that the company doesn’t match the employee contribution, it pays more, on a sliding scale depending on the employee contribution.
IIRC, if the employee pays in 2%, the company pays 5%; for 3% it pays 8%, and for 4% it pays 10%. The employee can pay in more than 4%, up to the annual cap (I don’t know the total but it’s way more than I would ever pay in), but the company will only pay in a maximum of 10%.
I am in the UK, where the rules are no doubt different from the US.
My employer matches a flat amount, based on which benefits package you choose. For folks choosing costly (to the company) employee benefits, their company matching contribution is smaller. For employees choosing the less costly benefits package (usually because they are covered through their spouse) their company matching contribution is larger.